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There are three important factors when it comes to making accurate predictions about the economy, according to Macroeconomic Advisers co-founder Chris Varvares.
“It’s science, which is the modeling; it’s judgment, which is paying enough attention to the data and bringing in alternative perspectives to know when the model isn’t going to get it exactly right; and there’s a good dosage of luck,” he said. “Last year, it was all three.”
Macroeconomic Advisers, based in St. Louis, was the most accurate forecaster of 2017 among participants in The Wall Street Journal’s monthly survey of economists.
The forecasting firm, which employs a sophisticated model of the U.S. economy and was purchased last year by IHS Markit, produces closely watched predictions for U.S. gross domestic product growth that are updated day by day as economic data are released.
Mr. Varvares said the firm’s forecast is a joint effort by him, fellow co-founder Joel Prakken and economists Ken Matheny and Ben Herzon.
At the start of 2017, they correctly predicted the Federal Reserve would raise interest rates three times by the end of the year, and their other forecasts were all reasonably close to the mark. They saw a 4.3% unemployment rate at year’s end. It was actually 4.1%. They thought GDP would expand 2.3% on the year, versus actual growth of 2.5%. They saw headline inflation of 1.9% and core inflation of 1.7%, versus actual figures of 1.7% and 1.5%.
On all five variables, they matched or beat the Fed’s own forecasts, based on policy makers’ median estimates in December 2016 for the coming year. The average of all forecasts in the Journal survey wasn’t far off, either, as the U.S. economy performed close to expectations last year.
The Journal’s rankings for 2017 were based on forecasts made by 67 forecasters in January 2017 for five key indicators: the federal-funds rate at the end of 2017, the unemployment rate in December 2017, GDP growth in the fourth quarter of 2017 from a year earlier, and inflation in the fourth quarter of 2017 from a year earlier as measured by the personal-consumption expenditures price index, both in overall terms and excluding food and energy.
The forecasters were ranked, first to last, for each indicator based on their absolute percent deviation from the actual figure as available in January 2018. Those five rankings were then averaged together. Macroeconomic Advisers had the lowest average ranking, indicating it was the most accurate forecaster.
The Wall Street Journal last ranked economists for their 2014 forecasts, under a different methodology.
Other top forecasters in the Journal’s ranking for 2017 were Donald Leavens and Steven Wilcox of NEMA Business Information Services, Scott Anderson from Bank of the West and Jim O’Sullivan of High Frequency Economics. Mr. O’Sullivan has been MarketWatch’s forecaster of the year for seven straight years.
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